Getting access to Medicare after years of paying into the system can feel like finally “making it.” However, once you begin receiving Medicare benefits, it’s important to understand that there are terms and conditions.
If you don’t pay attention to some of the rules, you could end up paying a penalty — and some penalties have lasting effects.
Here’s what you need to know about different Medicare penalties and how to avoid them.
1. Penalty for post-Medicare HSA contributions
When you turn 65 and sign up for Medicare, you can no longer make contributions to a health savings account (HSA). Once you have Medicare, your contribution limit is $0; anything beyond that is considered an excess contribution.
If you have an excess contribution to your HSA, you might be subject to additional taxes and a penalty:
- You must include the excess contribution amount in your gross income on your tax return and pay taxes on the amount.
- A 6% excise tax is levied as a penalty on the excess contribution amount.
It’s possible to avoid the 6% excise tax if you withdraw your excess contributions and their earnings and report them as income on your federal tax return before the return is due. You’ll still have to pay taxes on that income, though.
How to avoid the HSA contribution penalty
Pay attention to when you become eligible for Medicare Part A and note when you sign up.
If you sign up for Medicare during your initial enrollment period (the period encompassing the three months before you turn 65 through the three months after you turn 65), you should make your last HSA contribution in the month before you turn 65. That way, you can avoid a penalty and associated taxes.
It’s also possible to avoid a penalty by making your last HSA contribution in the month before you turn 65, assuming you sign up for Medicare within two months of when your initial enrollment period ends.
Things become trickier if you wait to sign up for Medicare. If you decide to sign up after you turn 65, you have two options to avoid the penalty, depending on how long you wait:
- Less than six months after turning 65: Stop making HSA contributions the month before you turn 65.
- At least six months after turning 65: Stop making HSA contributions six months before you apply for Medicare.
As you can see, HSA contributions can get complicated if you’re eligible for Medicare. Your best approach to avoiding the penalty is to make sure your final contributions are made before the month you turn 65 and pay attention to your enrollment period.
2. Penalty for late enrollment in Medicare Part A
Medicare Part A is often known as hospital insurance, as it primarily covers inpatient care.
You’re expected to enroll in Medicare Part A during your initial enrollment period. Except in certain circumstances, such as still being employed and having health insurance coverage through your employer, you could be subject to a late enrollment penalty if you miss this period.
With Medicare, you don’t just pay a one-time fee and then move on. Instead, your penalty is determined by how late you sign up.
With Medicare Part A, the late enrollment penalty can add an additional 10% to your monthly premium. You pay this penalty each month for twice the length of time that passed between when you should have signed up and when you actually did sign up.
For example, if you didn’t sign up for Medicare Part A until a year after you were eligible, you’ll pay the penalty for two years.
How to avoid the Part A late enrollment penalty
Make sure to sign up for Medicare Part A — whether via Original Medicare, aka traditional Medicare, or a Medicare Advantage plan — during your initial enrollment period. You don’t have to worry about the penalty if you sign up when you become eligible.
You can also check to see if you’re eligible for a special enrollment period. Find that out before your initial enrollment period normally ends so that you’re prepared.
Learn more about avoiding Medicare mistakes in “6 Things Retirees Wish They Had Known About Medicare Before Signing Up.”
3. Penalty for late enrollment in Medicare Part B
Medicare Part B primarily covers outpatient care like doctor appointments. Like Part A, you typically sign up for Part B during your initial enrollment period.
But unlike the penalty for Medicare Part A, which has an expiration date, the penalty for Medicare Part B is generally a lifetime penalty.
The penalty is 10% added to your monthly premium for each year you should have signed up for Medicare Part B but didn’t.
For example, if you wait two years to sign up for Medicare, you could see your Part B premium increased by 20% (10% for the first year you waited and another 10% for the second year). And that increase stays with your premium for life.
How to avoid the Part B late enrollment penalty
Find out when your enrollment period is and enroll on time, whether via Original Medicare or a Medicare Advantage plan.
Or, find out if you qualify for a special enrollment period to avoid the penalty.
4. Penalty for late enrollment in Medicare Part D
Prescription drug coverage, often referred to as Part D, is another piece of the Medicare puzzle. You’re generally expected to join prescription drug coverage when you enroll in Medicare. This most commonly means enrolling in a:
- Stand-alone drug plan (in the case of people who choose Original Medicare, which does not include drug coverage)
- Medicare Advantage plan that includes drug coverage (in the case of those who choose Medicare Advantage)
If you don’t enroll in drug coverage, you face a penalty of an extra 1% of the national base beneficiary premium — a set amount that changes each year — added to your premium for each month you don’t have coverage.
The longer you go without enrolling, the higher your penalty will be. Your penalty is applied for as long as you have Medicare drug coverage, even if you switch drug plans.
How to avoid the Part D late enrollment penalty
Depending on the situation, you might not need to enroll in drug coverage and can avoid the penalty that way. The two main situations that allow you to avoid the penalty are:
- You already have drug coverage similar to Medicare Part D, such as from a current or former employer.
- You qualify for Extra Help through Medicare.
If you don’t meet these conditions, you can avoid the Part D penalty by obtaining prescription drug coverage when you enroll in Medicare.
If you disagree with a Part D penalty
If you receive a letter indicating that you’re being charged a Part D late enrollment penalty, but you think it is inaccurate, you can request a review. Note that you must request it within 60 days of the date on your penalty letter.
Your letter will come with a reconsideration request form to fill out. When you send the form in, include copies of documentation proving your case, such as proof of an acceptable alternative drug plan you were enrolled in instead of Medicare Part D.
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